(Report Producer/Author: China Merchants Securities, Su Baoliang, Xiao Xinchen)
First, review the growth path of mergers and acquisitions of international integrated logistics giants
The history of the development of international logistics giants is also a history of mergers and acquisitions. The express delivery industry itself has significant scale effects and network effects, and if you want to quickly achieve scale effects and network effects, especially in the international market, there is great uncertainty based on endogenous growth alone. Looking back at the development history of giants such as UPS/FedEx, their business layout and scale growth rely on mergers and acquisitions, and they grasp key development nodes and achieve leapfrog growth in mergers and acquisitions.
1. Overview of ups' development history
(1) From endogenous to epitaxial, mergers and acquisitions accelerate the expansion of scale
Founded in 1907, UPS's growth history was divided into two phases: Endogenous Growth, From the United States to the World (1907 - 1990): In 1907, ups' predecessor, The American Courier Company, was founded in Seattle to provide courier, errands, and local same-city delivery services. In 1919, the company expanded for the first time from Seattle to Oakland, California, and officially changed its name to UPS. In 1922, UPS acquired The Russell Peck Company to qualify as a general carrier in southern Los Angeles. In 1930, UPS expanded for the first time to the East Coast of New York City and moved its headquarters to New York. In 1953, the company was licensed by the General Carrier in Chicago to officially start the General Carrier business. By 1975, UPS was the first private courier company to cover 48 states in the continental United States. In 1985, UPS first offered intercontinental airline next-day delivery between the U.S. and Europe. In 1988, UPS was approved by the Federal Aviation Administration (FAA) to establish UPS Airlines. By 1989, UPS's services had expanded to the Middle East, Africa, and the Pacific Rim, covering more than 220 countries around the world.
Multiple M&A, from express delivery to integrated logistics (1990-present): Since 1990, UPS has embarked on an intensive M&A period. In 1995 and 2000, it acquired Finon Sofecome, a top parts logistics company in France, and livingston, Canada's largest pharmaceutical and chemical logistics company, to lay out supply chain logistics and pharmaceutical logistics. In 2001, the acquisition of Mail Boxes expanded retail logistics, using Mail Boxes' 4,300 retail stores nationwide as receiving and shipping outlets, deepening the U.S. terminal network. It was followed by the purchase of First International Bancorp, the first international bank in the United States, and the establishment of UPS Capital to control the flow of funds and optimize the supply chain finance and supply chain management service capabilities. In the same year, the acquisition of Fritz Companies extended its business to the 70-500 kg range and entered the heavy goods market. In 2005, UPS invested $1.25 billion to purchase Overnite to enter the LTL express market. Buy Pieffe, Kiala, i-parcel, etc. to enter the pharmaceutical logistics and e-commerce markets. Become an integrated logistics service provider that integrates express delivery, express transportation, and all-round supply chain logistics (medicine, special logistics, high-value goods, etc.).
The company's endogenous growth is relatively slow, and mergers and acquisitions have accelerated the scale expansion. UPS spent nearly 100 years to complete endogenous growth and maturity of the main express delivery business, reaching a market value of $61 billion in 2001. Through mergers and acquisitions, in just two decades, UPS achieved 2 times the growth compared with the endogenous growth period, and the market value reached $181.7 billion in 2021. Revenue grew from $29,771 million (2000) to $84,628 million (2020).
The slow growth of the logistics industry is determined by several reasons: 1) the geographical nature of express delivery and logistics services. Due to factors such as the level of economic development and cultural differences between regions, it is difficult for logistics networks to be simply copied across regions; 2) the asset-heavy characteristics of logistics networks. Self-built networking takes a long time and is expensive, with capital expenditures ranging from 3%-9% to revenue. The construction cycle of international hubs is often as long as several years, and the construction of regional hubs, distribution centers, transshipment centers, fleets, fleets, and warehousing resources also limits the speed of endogenous growth and development to a certain extent. 3) Different products and services have considerable professional barriers (especially for supply chain logistics, such as high-value logistics, pharmaceutical logistics, etc.). Therefore, from the perspective of corporate strategic development, whether it is global expansion or rapid entry into emerging industries, mergers and acquisitions have a certain necessity.
(2) Geographical expansion + business diversification, mergers and acquisitions enhance synergies
Whether it is a geographical expansion type of merger or a diversified merger and acquisition of a rich product structure, UPS acquisitions tend to be global and low core business relevance, thereby avoiding the waste of resources caused by the overlap of geographical business scope or business scope. Overall, most of UPS's acquisitions have achieved the effect of "1+1>2", which has significantly increased the year-on-year revenue growth rate.
In terms of geographical expansion mergers and acquisitions, a typical case is the acquisition of Challenge Air Cargo (the largest air cargo company in Latin America) in 2000, which signed airspace free navigation agreements with 18 Companies in South America, and UPS combined its largest logistics transportation network in the United States with Chalenge Air Cargo's logistics network in South America, thus realizing the overall logistics network of the two continents of North and South America, and becoming the largest express and air transport company in Latin America. In 2001, UPS acquired Mail Boxes' 4,300 retail stores nationwide as receiving and shipping outlets, increasing the coverage density of terminal network outlets in the United States. In early 2004, UPS acquired its U.S.-Japan joint venture in Japan, UPS Yamato Express( Daiwa Express), becoming a wholly-owned subsidiary of UPS on April 1 of that year. In the same year, it acquired the China domestic parcel transportation network of Sinotrans, a joint venture company with Sinotrans, for about US$100 million, completing the layout of the express delivery network in the Asian market. It can be seen that UPS gives full play to the synergy effect of inter-regional network linkage, not only obtaining their respective domestic express delivery services, but also optimizing the international round-trip logistics business.
UPS diversified mergers and acquisitions focus on the enrichment of supply chain logistics subdivisions (high-value logistics, parts logistics - special logistics, pharmaceutical logistics, etc.) and the opening up of upstream and downstream links in the supply chain (trade financing, international freight forwarding, international trade consulting, etc.) to enhance customer stickiness.
In terms of high-value logistics, in 2015, UPS successively acquired Parcel Pro, a professional high-value cargo logistics company in the United States, and IPS, an international transportation and insurance company for high-value goods in the United Kingdom. In terms of parts logistics, the acquisition of Finon Sofecome, the largest parts logistics company in France, in 1999 made it a prominent player in the special logistics industry. In 2000, it acquired Comlasa and became the leading parts logistics service provider in Latin America. In terms of pharmaceutical logistics and life sciences logistics, in 2000, it acquired livingston in Canada, pieffe in Italy (2011), Cemelog in Hungary (2013), Polar Speed in the United Kingdom (2014), Poltraf in Poland (2015) and Marken in the United States (2016).
In terms of upstream and downstream supply chain, UPS merged with First International Bank in the United States in 2001, transforming it into a financial sector that greatly strengthened its supply chain financial supporting service capabilities. In the same year, Fritz Companies, one of the world's largest air freight and freight forwarding companies known for providing customs clearance, was acquired for $456 million and expanded its reach to the 70-500 kg range. Acquired Menlo Worldwide for $260 million in 2004 and acquired its air and ocean freight forwarding operations in more than 175 countries, while increasing air freight capacity. Subsequently, UPS acquired SEISA Brokerage (2013), STTAS (2017) and Zone Solutions (2017) to improve their business in customs brokerage, taxation and foreign trade zone operations, strengthening the company's ability to provide integrated supply chain services to customers.
LTL Express and Vehicle Logistics have a small number of mergers and acquisitions, but they are the first and second largest mergers and acquisitions in UPS's M&A history, respectively. In 2005, UPS acquired Overnite, a U.S. LTL freight company, for $1.225 billion. In 2015, UPS acquired trucking company Coyote for $1.8 billion. The two major mergers and acquisitions have increased UPS's market share in the vehicle and LTL freight markets. However, in the LTL space, UPS's two major mergers and acquisitions did not develop as smoothly as expected. As a result, in late January 2021, UPS decided to sell UPS Freight at a discount of $800 million to focus on the company's strengths.
It can be seen that most of UPS's mergers and acquisitions have given full play to the synergy effect. Mergers and acquisitions of the main express delivery business, such as the merger and acquisition of Yamato Express and Sinotrans China Network, do not coincide with the original network geographically, avoiding the waste of resources in the integration process, and also bringing about an increase in international round-trip business. Diversified business mergers and acquisitions, deep cultivation of supply chain logistics, through mergers and acquisitions to continuously break down professional barriers, into the high value, high profit margin market (special logistics, high value logistics, pharmaceutical logistics, etc.), improve the level of profitability.
2. Overview of FedEx's development history
Founded in 1971, FedEx is today the second largest international courier company and a pioneer and leader in air cargo. In just 50 years since its inception, FedEx has generated revenues of $69.693 billion (2019) and a 19-year CAGR of 7.30% (2000-2019). The company's air routes span the world and have world-class airlift facilities, with a fleet of 679 aircraft flying to 220 countries and territories around the world every day. FedEx's rapid growth depends on global expansion plans, with the core of which is a global expansion in the main business of express delivery. To date, FedEX has built a logistics network from the U.S. to the world.
FedEx's growth and M&A journey can also be divided into two phases:
U.S. domestic network construction, multiple mergers and acquisitions to build the cornerstone of integrated logistics capabilities (1971-2000): In 1973, FedEx started with air express delivery, focusing on the niche market of overnight express delivery, covering 25 cities in the United States. In 1977, FedEx had its first fleet (727-100C) and used its Falcon models to expand into small to mid-sized markets. In 1981, FedEx introduced a new product, overnight letters to the higher-end business parts market, competing directly with the United States Postal Service (USPS) for the first time. That same year, FedEx's sales surpassed those of fellow competitors in the air cargo small parcel market, such as Emery, Airborne Freight and Purolator Courier.
Starting with the Memphis International Hub, FedEx began building its classic hub network of hubs across the country to improve operational efficiency, opening a European hub at Brussels Airport in 1985. In 1986, sorting centers were opened in Oakland, California, and Newark, New Jersey. As the axial spoke network matured, FedEx began to plan to diversify its business structure, extending from small aviation parcels to the heavy and less than truckload freight markets on a weight-based basis, and acquisitions have since appeared frequently in FedEx's strategic planning. In 1989, Tiger International, a heavy air cargo company, was acquired to expand its heavy cargo business, and in the same year, the Heavy Weight business was launched for the first time, with an average weight of 794 pounds per shipment. In 1998, the Caliber System was acquired for $2.4 billion, officially entering the LTL market. In 2000, American Freightways, a LTL freight carrier with acquisition services in 40 U.S. states, became the leading LTL freight market.
Geographical expansion of the global network, focusing on a large number of acquisitions of exotic and local express delivery companies (2000-present): In 2000, FedEx integrated its internal business structure and began to build a global brand, renaming RPS to FedEx Ground, merging Calibre Logistics and Caliber Technology into FedEx Global Logistics, and American Freightways and Viking Freight changed its name to FedEx Freight. In the same year, in order to provide better international transportation services, it acquired customs brokerage, customs clearance company Tower Group and customs tariff information company World Tarrif to become the future FedEx Trade Networks; from 2006 to 2019, FedEx began to intensively acquire foreign express delivery companies.
In 2006, it acquired the British courier company ANC, and in 2007, it acquired the Indian courier company PAFEX, the Hungarian courier company Flying-Cargo and the Chinese courier company DTW. In 2011, it acquired the Indian express delivery company AFL Pvt and the Mexican express company MultiPack. In 2012, it acquired the Polish courier company Opek and the French courier company TATEX. In 2013, the Brazilian courier company Rapidão Cometa was acquired. In 2014, it acquired The South African courier company Supaswift. In 2016, it acquired TNT Express, the fourth largest international courier company, for $4.8 billion. In 2019, the acquisition of Israeli express delivery company Flying-Cargo. The expansion of the dense geographical network and mergers and acquisitions helped FedEx quickly establish a global integrated logistics network. (Source: Future Think Tank)
3. Mergers and acquisitions in the express delivery industry have obvious phased characteristics
(1) With the development of the express delivery industry, industry mergers and acquisitions show different characteristics
Summarizing the development experience of the EXPRESS delivery industry in the United States, it can be seen that the stage of industry development determines the type and characteristics of mergers and acquisitions. From the perspective of mergers and acquisitions, we believe that the development of the express delivery industry can be divided into four stages: start-up, growth, concentration and oligopoly.
Initial stage (1900s-1970s): The industry is rising rapidly, and enterprises are in their own exploration period, focusing on single express delivery business and regional business, with fewer mergers and acquisitions. Dating from around the 1900s to 1970s, UPS was founded in 1907 to provide courier, errands and local same-city delivery services. In 1946, TNT Express opened as the KW Transport Company. Purolator was founded in 1960 to provide postal courier services. DHL was founded in 1969 to provide international door-to-door express services and pioneer the international air express industry. FedEx was founded in 1971 and began operations on the day 14 small planes took off from Memphis Airport, delivering 186 packages to 25 U.S. cities.
Growth stage (1980s-2006): the rapid growth of first-mover enterprises, the growth rate of business volume in the express delivery industry has decreased, each express delivery company has built a mature express delivery network, the competition in the main express delivery industry has become increasingly fierce, the price war has forced the tail enterprises to clear, emerging and market segments have gradually emerged, and express delivery companies have transitioned from homogenization to differentiation. The main characteristics of mergers and acquisitions at this stage are: (1) the number of mergers and acquisitions is large, the scale is medium, and the concentration of the industry is increased. In 1999, there were 23 mergers and acquisitions between logistics and transportation companies in the United States, with a total M&A amount of $625 million. The industry's leading enterprises have acquired tail express delivery companies that have continued to lose money in the fierce competition, increasing market share and enhancing scale effects. (2) Diversified mergers and acquisitions have emerged, and the product structure of enterprises has gradually enriched, most of which are small mergers and acquisitions.
The price war has led to the liquidation of tail enterprises, and small interbank mergers and acquisitions have occurred frequently
In 1981, the year-on-year growth rate of FedEx Express express traffic fell to 28.2% for the first time, and the year-on-year growth rate of express delivery business volume fell from a high of 1985 (58.3%) to 5.1% (1991). That same year, FedEx launched the first express industry price war (1981-1989) in eight years, and FedEx Expess's single ticket revenue fell from $26.46 (1981) to $16.42 (1989). From the perspective of the M&A market, the price war brought about by the fierce industry competition makes it difficult for the tail enterprises to continue to operate, and some enterprises sell loss-making express delivery business, resulting in an increase in the number of M&A targets at suitable prices. From 1984 to 1989, Purolator and Emery, the main competitors in the overnight small parcel market, were acquired successively.
From 1994 to 2002, the year-over-year growth in FedEx Express volumes once again experienced a decline, from 20.5% to -5.8%. In 1991, FedEx launched its second price war in the express industry, and FedEx Express's revenue per ticket fell from $17.08 (1991) to $14.84 (1997). In 2003, Airborne Express, also a major competitor in the overnight small parcel market, was acquired by DHL.
Diversified mergers and acquisitions enrich the product structure, from homogenization to differentiation
The domestic express logistics network in the United States has been basically completed, and UPS and FedEx have expanded the product weight coverage vertically on the one hand, and expanded multi-industry logistics solutions horizontally on the other hand, so as to further improve the overall product structure. Vertically, FedEx seized the lead, acquiring Flying Tiger in 1989 for $880 million, providing air heavy cargo services for the first time, officially entering the cargo market, becoming the world's largest air cargo company. In 1998, the acquisition of Caliber System officially entered the LTL market, with RPS and Vikings merging into FedEx Freight and Caliber entering its supply chain division. In 2001, it acquired American Freightways for $978 million to become a leader in the LTL freight market, and in the third quarter of the same year, the FedEx Freight division was established to focus on the LTL market. This is where FedEx has the ability to provide full-weight logistics services from small parcels to heavy LTL.
UPS acquired Challenge Air Cargo in 2000 to enter the air cargo market, becoming the largest air cargo company in Latin America. The following year, the acquisition of Fritz Companies expanded its business structure to a range of 70-500 kg. In 2005, overnite was acquired for $1.25 billion, expanding Overnite's more than 6,000 customers across the United States and gaining a large LTL capacity. Similarly, UPS has full-weight logistics capabilities from small parcels to large LTL.
UPS and FedEx have embarked on their own paths of differentiation, and the different directions of the company's strategic development have led to different types of mergers and acquisitions. After establishing a relatively complete express delivery network, UPS focused on deepening its supply chain logistics service capabilities. The acquisition of Overnite increased UPS LTL revenue from 1.8% (2005) to 3.9% (2006), but remained 9.1 percentage points below UPS's supply chain revenue share (13%, 2006). In 2013, the proportion of UPS supply chain business and LTL business began to diverge, with the proportion of UPS Supply chain revenue rising from 11.6% (2013) to 14.4% (2019), and the proportion of UPS Freight revenue decreasing from a peak of 4.5% (2013) to 3.6%. Compared with UPS, FedEx pays more attention to LTL business, and in 2005-2019, FedEx Freight's operating income accounted for 7-9 percentage points higher than UPS Freight's operating income. In 2020, FedEx Freight's LTL business revenue reached 7.115 billion US dollars, occupying the leading position in the LTL market, with a market share of 16.89%, and forming a relatively stable monopoly competition pattern with large national network LTL enterprises such as ODFL and XPO Logistics.
Concentration stage (2006-2017): The main characteristics of mergers and acquisitions at this stage are: (1) the liquidation of small express delivery enterprises is completed, the monopoly competition pattern is formed, and the concentration of head enterprises is improved. After the acquisition of Airborne in 2003, the liquidation stage of small-scale competitors in the express delivery industry ended, forming a monopoly competition pattern. In 2012, FedEx launched its third price war. During the period, FedEx Express's revenue per ticket fell from $22.44 (2012) to $17.45 (2017), and TNT, the world's fourth-largest express delivery company, was twice invited to buy (UPS's acquisition of TNT in 2012 was rejected by the EU antitrust), and was acquired by FedEx in 2016. The acquisition significantly increased FedEx's market share in the European express market. In 2013, FedEx had only 10% of the market share in the European limited-time express market, and TNT accounted for 14%. Based on the 2013 European express delivery industry market share data, FedEx's market share in the European market after the merger will rise to the second largest in the industry, second only to DHL. From 2016 to 2017, FedEx's operating income in the US domestic market decreased from 75.59% to 66.76% due to the merger of TNT, and the European market's share of FedEx's operating income increased.
(2) The logistics products of express delivery enterprises are further subdivided, and leading enterprises are more extensively distributing diversified businesses. In the first part of this article, the diversified acquisition layout of UPS since 2006 is elaborated, and the focus of the extended acquisition is to broaden the supply chain logistics segment (high-value logistics, parts logistics - special logistics, pharmaceutical logistics, etc.) that are more differentiated than traditional express services, with higher value and higher profit margins. The different strategic development directions of the two international giants have led to their different mergers and acquisitions ideas. Compared with UPS's diversification strategy and rich product matrix, FedEx is more committed to the expansion of the global express network.
Oligopoly Phase (2017-present): The oligopoly landscape of UPS, FedEx and DHL has been formed and is relatively stable, and the industry has moved from competition to cooperation. Due to the similar scale of industry leaders, each occupies an advantageous market segment, and the competitive pattern is stable. Differentiated competition has enabled the industry to enter a benign development track, and the profitability of the industry has been improved. At this stage, diversified mergers and acquisitions are the mainstay, and enterprises hope to further strengthen the competitive advantages of market segments and cut into the rapidly developing emerging logistics track. For example, in 2017-18, FedEx acquired Northwest Research (2017) and P2P Mailing (2018) to strengthen e-commerce logistics service capabilities and cross-border e-commerce logistics service capabilities.
(2) Industry mergers and acquisitions play a synergistic effect to help enterprises achieve leapfrog growth
In the historical M&A cases of UPS and FedEx, interbank M&A and diversified M&A complement each other. Among them, interbank mergers and acquisitions are mostly asset-based acquisitions that improve and expand the express logistics network, while multiple mergers and acquisitions are mostly resource-based acquisitions that break down professional barriers. Both types of mergers and acquisitions have brought strong synergies to enterprises and enabled them to achieve leapfrog growth.
Synergy-based expansion of logistics networks
The most core asset of the logistics industry is an efficient logistics network, relying on the expansion of the logistics network on a global scale, the business volume of express logistics enterprises has grown rapidly and achieved great scale effects. Taking FedEx as an example, in order to quickly establish a global logistics network, from 2006 to 2019, FedEx acquired foreign local express delivery companies in the United Kingdom, India, Hungary, Mexico, Poland, France, South Africa, Israel and other countries. 2006 was the first year that FedEx opened the merger and acquisition of international express delivery companies (UK, ANC), and in the same year, the average daily volume of FedEx Express increased by 8.90pcts to 18.24%, and continued to rise with the progress of FedEx international mergers and acquisitions, reaching a peak of 30.92% in 2008 (PAFEX/Flying Cargo/DTW, India/Israel/China).
After the world recovered from the financial crisis, from 2010 to 2013, the average daily volume of FedEx International Express continued to grow year by year with the expansion of FedEx's international logistics network, and the year-on-year growth rate also increased year by year. In 2014 and 2015, FedEx did not acquire exotic local express deliveries, and the average daily volume of international express deliveries fell significantly year-on-year. The acquisition of TNT in 2016 was the largest inter-industry acquisition in FedEx's history, and the TNT integration ended the following year, and the average daily volume of FedEx International Express increased by 119.75% year-on-year.
FedEx foreign local express mergers and acquisitions have brought about further layering of international express delivery products, from providing only international priority express delivery from the United States to other parts of the world, extending to providing international and domestic express delivery from other parts of the world to the United States, and further layering of international express products in the later period is high-end high-priced international priority express delivery and slower international economic express delivery and international and domestic express delivery with low price.
While the merger and acquisition brought about international volume growth and business structure optimization and stratification, FedEx International Priority Express single ticket revenue remained in a stable price range, with the highest single ticket revenue of $61.88 (2014) and the lowest single ticket price of $53.96 (2019). In addition to the 17.59% year-on-year increase in single ticket revenue in 2006, the average annual revenue of international priority express delivery in the 2006-2019 range increased by 0.84% year-on-year, and the international express business showed a stable trend of volume increase. The scale of operating income increased from US$6.338 billion in 2006 to RMB15.391 billion in 2019, with a compound annual growth rate of 6.54%.
The breaking down of professional barriers to synergy
From standardization to differentiation, from low barriers to entry barriers, from low gross profit to high gross profit is the inevitable process for the business development of express logistics enterprises. UPS takes the lead in achieving diversification before all international logistics enterprises, entering the differentiated tracks such as high-tech parts logistics, high-value cargo logistics and pharmaceutical cold transportation, and extending the upstream and downstream of the supply chain to build a comprehensive and integrated supply chain logistics service capability.
Taking cold chain logistics as an example, compared with normal temperature logistics, cold chain logistics involves refrigeration technology, thermal insulation technology, temperature and humidity detection, information system and product change mechanism research and other technologies in the process of transportation and storage, and each product has its corresponding temperature and humidity and storage time requirements, which greatly increases the complexity of cold chain logistics. UPS has successively acquired world-renowned cold chain enterprises, obtained their assets and successfully entered the local pharmaceutical cold chain market, and its profit margin has increased significantly. In 2011, it acquired Pieffe, one of Italy's most prestigious pharmaceutical logistics companies, and acquired 753,500 square feet of 12 of its 12 cold storage areas, with the Supply Chain & Express segment operating margin remaining high at 6.64% that year.
In 2013, the acquisition of Hungary Pharmaceutical Logistics cemelog and the acquisition of its three pharmaceutical logistics distribution centers totaling 255,000 square feet increased the profit margin of the Supply Chain & Express segment to 7.5%. In 2015, UPS acquired Poltraf, a Polish healthcare logistics company, from ORTIE, adding three specialized medical warehouse management systems to UPS's existing 11 medical logistics warehousing centers, and in the same year, UPS acquired Parcel Pro, a leading logistics provider in the high-value jewelry, watch and collectibles industry, which increased its operating margin to 8.1%.
In order to enhance the customer stickiness of the supply chain, UPS takes the supply chain as the center, and acquires enterprises including Customs Brokerage (Fritz Companies), Supply Chain Finance (First International Bancorp), High Value Cargo Insurance (IPS), International Trade Consulting (STTAS) and other enterprises, providing value-added services for the main logistics business from the three aspects of logistics, capital flow and information flow, so that customers have to choose it as a logistics service provider. Further improve its core competitiveness in supply chain logistics services. Among them, IPS (Insured Parcel Services), the logistics division of G4S, a leading global integrated security company, complements and strengthens UPS's ability to provide higher supply chain risk mitigation capabilities and enhance global delivery capabilities for high-value parcel shippers.
In addition, UPS's parcel shipping coverage prior to Fritz's acquisition included only under 70 kilograms of goods (due to the insurance limit of 70 kilograms for U.S. shipping workers), and Fritz covered an area that happened to be the 70-500 kilogram range that UPS was less involved in, so that the coverage of UPS logistics business was greatly expanded.
Second, China Express has entered a year of change, and the industry has ushered in a period of intensive mergers and acquisitions
1. China Express is moving towards an oligopoly, and mergers and acquisitions are characterized by stages
Looking back at the development process of China's express delivery industry, we believe that its phased characteristics are also similar to the development of the US express delivery industry.
(1) Initial stage: From 1992 to 2005, China Express was in a difficult era of "black express", when the scale of express delivery business was small, and the goods were mainly letters. In addition, under the monopoly of EMS, private express delivery does not have legal operating qualifications. From 2006 to 2010, China's private express delivery obtained legal status, while electronic commerce began to emerge, the scale of express delivery continued to expand, and the growth rate of industry business volume in 2008-2010 was about 20-30%.
(2) Growth stage: 2011-2016, with the popularity of smart phones, the penetration rate of online shopping has increased rapidly, and the scale of express delivery has been rapidly expanded, and the annual growth rate of express delivery business volume in this stage has reached 50%-60%, and the average annual volume has exceeded 10 billion pieces, and private express delivery has achieved rapid growth. In 2017-2019, the growth rate of online shopping slowed down, the sinking market demand was gradually released, the scale expansion rate of this stage slowed down, the annual growth rate of express delivery business volume was about 20-30%, and the growth rate of business volume exceeded 60 billion pieces in 2020. At the end of the growth stage, the express delivery price war was more intense, the tail express delivery companies have been cleared, and the concentration of CR8 continued to increase. At this time, a large number of small-scale mergers and acquisitions in the same industry appear frequently, and diversified mergers and acquisitions have gradually emerged.
(3) Concentration stage: Since 2020, the e-commerce dividend has gradually declined, the industry has entered the stock game stage, the competition of head enterprises has intensified, the first-line express delivery companies have diverged, and the concentration of CR3 has continued to increase. In 2021, the supervision of the express delivery industry will become stricter, the price competition of the head enterprises will slow down, and the industry will change to differentiated competition. At present, China's express delivery industry is moving from the centralized stage to the oligopoly stage, which is manifested in the increase in the concentration of head enterprises, at this time, large-scale mergers and acquisitions in the same industry and diversified mergers and acquisitions have emerged.
(1) The price war at the end of the growth stage is fierce, and the tail enterprises are cleared
From 2017 to 2019, China's express delivery industry is in the stage of shifting gears and reducing speed, the penetration rate of online shopping in the whole society is limited, and the fierce price war in the stock market has led to the acceleration of the departure of second- and third-line express delivery companies. From 17 to 19 years, the business volume growth rate of the mainland express delivery industry was 28%, 26.6% and 25.3% respectively; compared with 17 years ago, the overall industry growth rate fell by about 20-30 percentage points. The fierce price war of 19 years eroded industry profits, and the tail enterprises had operational difficulties. In the logistics industry, where the scale effect is obvious, the scale of business is inversely proportional to the cost of a single ticket, and the low cost of the head enterprise is conducive to further expanding the market share and forming a virtuous circle. In terms of cost control and business scale, the gap between tail express delivery companies and head enterprises is getting bigger and bigger, and in 2019, such as Fengda Express, Guotong Express, Pinjun Express, Quanyi Express, and remote logistics have fallen into difficulties. According to PwC research reports, the overall number of M&A transactions in the express delivery industry increased in 2019, but the scale of mergers and acquisitions was relatively small.
(2) In the early stage of the concentration stage, the head enterprises continued to differentiate, and large-scale mergers and acquisitions in the same industry appeared
After the second-tier enterprises are basically liquidated, the first-tier express delivery companies will mainly rely on the advantages of cost and service quality to expand the scale effect in the future, or achieve the improvement of industry concentration through restructuring and mergers and acquisitions, and eventually move towards an oligopoly. In 2021, the internal competition of the Tongda Department continued, the scale of head express delivery with comprehensive strength advantages continued to expand, and the industry CR3 continued to improve; the market share of the first echelon companies of Zhongtong, Yunda and Yuantong increased with Shentong and Baishi, and the gap between the market share of Zhongtong and Shentong expanded from 7.5% in 19 years to 10.4% in 21 years.
At this stage, large-scale interbank mergers and acquisitions in the industry began to appear. In November 2021, Best announced that it had agreed to transfer its domestic express delivery business to Jitu for a consideration of approximately RMB6.8 billion due to continuous losses, and the transaction was completed in the first quarter of 2022. This event symbolizes that the industry integration has entered a new stage, and the spillover effect of the acquisition in the short term is good for the performance improvement and profit repair of the head express delivery company, and the long-term depends on the integration effect.
For Jitu, the acquisition of Best will gain Taoshi traffic and rapid expansion of business volume. According to the latest share capital structure of Best Group, Alibaba Group holds 37.1% of the shares of Best Group, and after The acquisition of Best Express business by Best Rabbit, Best Express will obtain the port of Best Express between Tmall and Taobao, which also means that the traffic competition pattern of Alibaba's e-commerce will usher in new changes. The market share of Best Express accounts for about 7-8% of the country, and according to the State Administration of Market Regulation, the market share of Jitu after mergers and acquisitions will reach between 10% and 15%. After the completion of the merger, Jitu will replace Shentong as the fourth largest e-commerce express delivery in China.
However, inter-industry mergers and acquisitions are also facing integration problems, and the integration of Best and Jitu at the level of terminal outlets has become one of the decisive factors affecting the effectiveness of this merger and acquisition. Two franchised express delivery companies will inevitably have regional overlap in the network layout, and how to effectively integrate resources is a key factor that Jitu needs to consider. According to Double One information, Jitu proposed a network integration plan for four possible scenarios. Among them, in two scenarios, "1 + 1 = 2" can be realized, that is, both Jitu and Baishi franchisees can be retained: (1) Regional split, Jitu franchisees and Baishi franchisees become the only franchisees in the region after the split. (2) Jitu franchisees and Best franchisees jointly become the only franchisees in the region. In the other two scenarios, franchisees are mainly screened based on business volume, which ensures the minimum loss under resource integration, that is, (3) based on business volume, one of which terminates the contract and withdraws, and the other party becomes the only franchisee in the region. (4) The original Pole Rabbit and the Best franchisees have withdrawn, and the agent area is looking for new franchisees. (Source: Future Think Tank)
(3) There is still differentiated competition in the express delivery industry, and diversified mergers and acquisitions continue to emerge
The above mainly summarizes the development of mergers and acquisitions in the field of e-commerce express delivery, because the franchise express delivery enterprises have a strong scale effect, a high degree of product homogenization, and a cost-leading competitive strategy has become the best choice in the current period, so less attention is paid to the diversified product layout, so diversified mergers and acquisitions between such express delivery companies are less common. Focusing on the high-end market, SF inevitably chooses a differentiated competitive strategy, takes the lead in diversifying its product layout, and gradually develops several highly customized business sectors such as cold chain, express transportation, and supply chain, and matches with traditional express delivery business to create a complete product system.
SF has quickly entered the emerging logistics field through diversified mergers and acquisitions, so as to gain a greater competitive advantage. At present, the new business of 2B end such as heavy goods, cold chain, and supply chain has a small market concentration, but the market potential is large, and there are many competitors and relatively scattered. Cutting in first (through the acquisition of companies in the existing field is faster) and laying an exclusive logistics network is conducive to forming a first-mover advantage (B-end users are more sticky), while the fixed cost is diluted after the business starts, and the price of a single ticket after steady operation will have a greater competitive advantage in the market. Latecomers will face huge network laying costs and customer acquisition costs, and the barriers to entry are high.
In 2018, SF acquired Simpang Logistics, and after integration, it established a new company, Shunxin Jetta, and laid out a franchise-based express network, and the current SF Express sector has reached the first place in the industry in terms of business volume and revenue; in the same year, SF invested in the establishment of New Xia Hui and acquired DHL's supply chain business in China, thus quickly cutting into the cold chain logistics and supply chain logistics track. In addition, SF invested in Flexport to enhance its scientific and technological strength and enhance its integrated logistics solution capabilities. In October 2021, Kerry Logistics was consolidated into SF's consolidated statements. SF can take advantage of Kerry Logistics' advantages in international network coverage (especially in Southeast Asia), international logistics operation experience and product structure to accelerate its global network layout. As of the first half of 2021, the revenue share of SF's new business segment (heavy goods + cold transportation + same-city distribution + international + supply chain) increased to 26.7% (total about 18.042 billion yuan, +24.5% year-on-year). The integrated logistics map has been completed.
2. Prospect of the development trend of China's express M&A
Through the analysis and comparison of the previous article, we can find that the merger and acquisition trend of Chinese express delivery companies is similar to the merger and acquisition history of American express delivery companies, and both have phased characteristics. But there are still differences, on the one hand, the domestic express delivery industry in a specific period of rapid development, the industry pattern changes rapidly, each cycle is relatively short, the transition between different stages is relatively short; on the other hand, the United States express giants in the global expansion and diversification of the layout of the development is better, while the domestic express delivery enterprises in the global expansion is still in its infancy, diversified products such as express LTL, supply chain logistics, cold chain logistics, etc. are also in the early stage of development.
Looking ahead, we believe that the M&A market in China's express delivery industry will show two major trends:
1) Large interbank mergers and acquisitions will continue to emerge. At present, the domestic e-commerce express delivery field has not yet formed a relatively stable oligopoly pattern, so franchised express delivery companies still need to continue to pursue market share to obtain a stronger scale effect. We judge that first-line express delivery companies will continue to differentiate, large-scale interbank mergers and acquisitions will continue to appear in the future, and CR3 market share is expected to further increase.
2) Diversified mergers and acquisitions are becoming more frequent. On the one hand, SF Holdings, with the differentiation strategy as the core, still has room for expansion in many fields: the scale of the franchise network in the economic parts sector is still small, and the existing franchise network can be acquired in the future to obtain core resources and refined management capabilities; there are more subdivisions of the supply chain sector, and in the future, it can merge and acquire existing small supply chain solution companies to obtain professional talents and core customer resources in the subdivision industry; the international logistics sector is relatively weak, and the local traditional express delivery company can be acquired in the future. Get core network resources and last-mile solution capabilities. On the other hand, with the decline of e-commerce dividends, if the domestic traditional e-commerce express delivery companies achieve an oligopolistic pattern, then the head enterprises will continue to participate in emerging markets to achieve sustainable development. At this time, the traditional e-commerce express delivery will extend to diversified products, and the number of diversified mergers and acquisitions is expected to continue to increase in the future.
Third, industry views and investment analysis
We reiterate the following core industry perspectives
1. Demand: Medium-term e-commerce express delivery to maintain prosperity, sinking market demand still has a lot of room for improvement
Under the epidemic, the total retail sales of consumer goods in the whole society have declined, but the growth rate of online retail sales of physical goods has remained positive. Under the normalization of epidemic prevention and control, the overall penetration rate of online shopping will remain upward. In the medium term, there is still much room for improvement in the demand for e-commerce express delivery in the sinking market. New e-commerce platforms such as Pinduoduo, new retail methods such as live streaming with goods, community group buying will continue to drive the sinking market per capita online shopping frequency to achieve rapid growth, is expected to grow more than 20% in 2022.
2. Medium-term competition pattern: Regulatory policies will exacerbate the differentiation of leaders, and the industry pattern is expected to be clearer
This year's express delivery industry regulatory policies are frequently introduced, in April 2021, the Zhejiang Provincial Government passed the "Zhejiang Express Industry Promotion Regulations (Draft)", at the end of August 2021, the major logistics companies responded to the "Opinions on Doing a Good Job in protecting the Legitimate Rights and Interests of Courier Groups" formulated by the seven departments to announce the increase in the payment fee, and at the end of September 2021, the Zhejiang Provincial Government officially issued the "Zhejiang Express Industry Promotion Regulations". Through recent data observation, we believe that the industry price war has been alleviated in stages, and the survival pressure of Canadian outlets and the subsidy pressure of major express delivery companies' headquarters have been reduced to a certain extent. New entrants in the industry can no longer achieve large-scale share expansion in the form of low-price rushing, and the industry's leading enterprises are expected to expand their competitive advantages, and the overall concentration is expected to be improved.
3. New trends in the industry: B-end logistics is a vast blue ocean, and multiple models in the field of large logistics are expected to develop together
In the long run, multiple models in the field of large logistics will develop together. At present, the Cainiao network represented by Zhongtong, SF, Jingdong and Ali has formed different development models, and the future of the large logistics field will form an industry pattern of common development of multiple models.
Zhongtong - cost leadership to expand the market share of e-commerce parts. Franchised e-commerce express delivery companies represented by Zhongtong expand their market share through the cost-leading strategy, and take "cost performance" as the trump card in the standardized e-commerce parts market. Under the franchise system, the rapid expansion increases the market share, and the cost is reduced under the scale effect, so as to further expand the market share to gain the leading position.
SF - to create a diversified integrated logistics model. Based on the time-sensitive parts, we carry out diversified logistics business, such as express transportation, cold chain, same city, international business, etc. On the one hand, we should get rid of the limitations of single business development and open up new profit growth points; on the other hand, we should also create a diversified logistics ecosystem through the development of new businesses, broaden the boundaries of business, and form synergies. In addition, the company adheres to the positioning of independent third parties and relies on integrated logistics to provide customers with integrated supply chain solutions.
Jingdong - backed by its own platform warehouse integration. Using big data and Internet of Things technology to predict commodity sales and regions in advance, the goods of their own platforms and some third-party sellers are uniformly stored in various cities and warehouses, and customers place orders directly from the nearest warehouse to customers, greatly improving distribution efficiency. RELYING ON THE NATIONAL WAREHOUSE NETWORK, Jingdong provides customers with one-stop warehousing and distribution services, and the company has a greater competitive advantage in the field of consumer supply chain.
Cainiao Network - To build a technology logistics platform, the globalization strategy to expand the scale of business. Cainiao focuses on the platform service of logistics network. Through technological innovation and efficient collaboration, we will continue to promote the digital and intelligent upgrading of the express logistics industry. Cainiao works with partners to build a global logistics network to enhance the logistics experience for global consumers, provide smart supply chain solutions for global merchants, and help reduce logistics costs in the whole society.
(This article is for informational purposes only and does not represent any of our investment advice.) For usage information, see the original report. ）
Featured report source: [Future Think Tank]. Future Think Tank - Official website